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Curious Cat Kivans

Investing and Economics Blog

Credit scores are far from a great measure of weather a person is a great credit risk for a specific loan, in my opinion. However, they are very widely used and therefor, very important. They also are somewhat useful. And lenders don’t base judgement solely on credit scores, they consider many other factors, if they have any sense at all.

Credit scores range from 300 to 850. They are calculated by various credit reporting organizations, including FICO. They factor in payment history, percent of outstanding credit available that is used, credit report checks, length of outstanding credit accounts, etc..

Peer to peer lending platform, Lending Club, limits loans to those with a minimum credit score of 660 (remember there are multiple organizations that provide credit scores, this minimum is based on Lending Club’s score). In general I see scores above 700 in A and B loans, scores from 650-700 in C and D loans. Remember the credit score is not the only factor setting the rate (you will see scores above 700 in the C loans sometimes, etc.). Credit scores provide some insight but are just 1 factor in approving loans or setting rates (an important one but not a completely dominant one).

About 38% of people have credit scores from 750-850. Another 37% from 600-749 and about 25% from 350-599.

Vantage Score decided to make their score range go up to 1000, not the standard 850. Maybe a 750 score for them is comparable to 680? They say super-prime is 900+ (750-850 on more common scale), prime is 701-900 (680-739), near-prime 641-700 (620-679), subprime 501-640 (550-619). Anyway that chart shows the changing default rates from 2003 to 2010 by type of loan.

For guidance, the following table generally matches a borrower’s odds-of-default with the corresponding FICO 8 score (calculated on performance from Oct 2008 – Oct 2010). Of course, the range of scores and odds-of-default [the data is related to mortgages] will vary with each model as creditors develop and validate their own credit scoring models.

Odds-of Default

FICO 8 Score

percent of population**

5:1

610

9%

10:1

645

9%

20:1

685

6%

30:1

705

6%

40:1

720

6%

50:1

735

9%

100:1

770

30%

As you can see at a 610 level, 20 loans out of 100 defaulted. At 685 just 5 in 100 defaulted and at 770 just 1 in 100 did.

** I had to adjust this, because the report didn’t report it in this form, so it a very approximate measure (I made estimates for something like scores from 735 to 769 etc.). Again this is data from the Oct 2008 – Oct 2010 period. The rest of the population (about 25%) would have scores below 610.

This page references a Fed report (that I can’t find) that found the following default rates on new loans for the two years after origination, 2000-2002:

Credit score range

Default rate*

under 520

41%

520-559

28%

560-599

23%

600-639

16%

640-679

9%

680-719

4.4%

over 720

<1%

***

The Consumer Financial Health Study respondents were asked to self-assess their credit quality and for permission to pull their actual credit scores.8 Forty-five percent of survey participants granted permission, yielding an “opt-in” sample size of 3,215. We appended two objective measures of creditworthiness to the dataset: Experian provided VantageScore 3.0 credit scores, and LexisNexisÂ® Risk Solutions provided RiskViewâ„¢ scores. VantageScore is a generic credit scoring model that was created by the three major credit bureaus (EquifaxÂ®, Experian and TransUnionÂ®) and, in addition to
tradeline data, includes rent, utility and cell phone payment data when it is available in consumer credit files.